Inflation Is in the Eye of the Beholder

Tuesday, 16 Oct 2012 10:13 AM

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INDICATOR: September Consumer Price Index/Real Earnings

KEY DATA: CPI: Up 0.6 percent; Excluding Energy: Up 0.1 percent; Energy: Up 4.5 percent/Real Earnings: Down 0.3 percent

IN A NUTSHELL: “While most prices are under control, the surge in energy costs is draining household spending power.”

WHAT IT MEANS:
With incomes growing minimally, inflation is a key factor in determining purchasing power and whether the recent surge in household spending can continue.

Well, all is not perfect when it comes to the cost of buying the daily things we need. Consumer prices jumped in September, led by another bounce in gasoline and a turnaround in natural gas costs.

There were also moderate increases in medical care expenses and shelter, as well as the usual huge increase in education costs. People might complain about their taxes to pay for K-12 education, but those expenses are going nowhere compared with private education, especially universities.

But most of the other components were pretty much under control, with food yet to show any increase due to the drought. Instead, meat prices are plummeting, as herds are being thinned due to the high costs of feed.

Both new and used vehicle prices eased, but with sales solid, that might not last long.

Cake, cupcakes and cookie prices were down, a key factor in my budget.

With overall consumer prices jumping but wages rising more slowly, real earnings fell once again. That is not a good sign for future household consumption.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is in the eye of the beholder. Not really.

While the Fed might say that the 2 percent increase over the year for all goods is right where they want it to be, it is still faster than the rise in wages. The only way household income has been able to rise is by workers working longer hours. That hardly makes people feel good about the world.

So when it comes to real people, inflation is simply too high. The falling spending power reinforces my point that unless labor income starts to rise faster, the potential for the recovery will be limited. If wages are going to be restrained, then hiring has to ramp up, and that brings us back to the fiscal cliff and the damage being done to the economy by the gridlock in Washington.

In other words, all the economic data argue that the best jobs program is a resolution of the insanity in Congress and that is what worries me, as it obviously does CEOs.

When your economy depends upon rational actions out of politicians, you really are in trouble.

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